About 1,000 Baltimore-area residents are expected to receive thousands of dollars each under a landmark $175 million settlement between the U.S. Department of Justice and Wells Fargo over accusations of discriminatory lending practices.

Under the terms of the deal announced Thursday, Wells Fargo also will provide $7.5 million to the city of Baltimore, which federal officials credited with first raising issues of discrimination related to bank's subprime mortgages.

The city alleged Wells Fargo steered minorities into subprime loans, gave them less favorable rates than white borrowers and foreclosed on hundreds of Baltimore homes, creating blight and higher public safety costs. Wells Fargo is the largest residential home mortgage originator in the United States.

"Baltimore got the ball rolling," said Assistant Attorney General Thomas E. Perez, who heads the Department of Justice's civil rights division. "The federal government heard you and the federal government followed up."

The deal is the second largest fair-lending settlement in the department's history, said Perez, a former Maryland labor secretary.

The settlement provides $125 million in payments to borrowers, including an estimated $2.5 million in the Baltimore area. Minority borrowers who were steered into subprime mortgages will receive an average payment of $15,000 each, Perez said. Blacks and Hispanics who paid higher fees and rates than white borrowers because of their race or national origin will receive smaller payments that will be determined based on what they were charged.

As part of the agreement, Wells Fargo will pay for an independent administrator to find and compensate more than 30,000 residents nationwide affected by the bank's lending practices. (Residents who believe they qualify can email wellsfargo.settlement@usdoj.gov.)

To address concerns about blight, Wells Fargo also will provide $50 million in direct down-payment assistance to borrowers in Baltimore and seven other communities nationwide that were hit hard by the housing crisis and where federal officials identified large numbers of discrimination victims.

"This practice caused harm to families, neighborhoods and the city's tax base," Mayor Stephanie Rawlings-Blake said. "The agreement puts to rest our legal challenges and allows us to move forward collaboratively and work on growing the city."

Mike Heid, president of Wells Fargo Home Mortgage, said in a statement that his company was "settling this matter ... to avoid a long and costly legal fight, and to instead devote our resources to continuing to contribute to the country's housing recovery."

The bank said it stopped making subprime loans through independent mortgage brokers in 2007 and stopped all subprime home lending in 2008.

Even though the bank agreed to settle the suit, Wells Fargo spokesman Oscar Suris said it still rejects claims that it engaged in discriminatory practices. "The value in settling to us is to get this behind us," he said.

Wells Fargo brought in more than $80 billion in revenue last year and nearly $16 billion in profit.

The Justice Department's lawsuit alleged the bank discriminated against African-American and Latino borrowers between 2004 and 2009. The federal government said that black and Hispanic residents were more likely to be placed in a subprime loan than their white counterparts even if they qualified for a better loan.

"That's called discrimination with a smile," Perez said.

At a news conference at City Hall, he told a story about an "80-year-old African-American resident of the Baltimore area with a 714 credit score and a rock-solid credit file who received a subprime loan instead of a prime loan, and who was not told that she may have qualified for a prime loan with better terms."

"By the time she realized she had an adjustable-rate mortgage, and not the fixed rate she thought, it was too late," Perez said. "The damage was done."

Wells Fargo said it agreed to pay $4.5 million to Baltimore for down-payment assistance, and will grant the city $3 million in additional funds for foreclosure-related initiatives.

Wells Fargo also set a five-year goal of lending $425 million for mortgages in Baltimore, an amount city officials called an increase over current lending levels. This commitment includes $125 million in loans for low- and moderate-income residents.

City Solicitor George Nilson said Baltimore will receive the $3 million payment next month, but officials have not yet determined how to use it. Officials said the $4.5 million will be administered by a not-yet-selected nonprofit. They said the program will be launched in late 2012 or 2013.

"This will greatly assist those looking to buy a home," Rawlings-Blake said.

The settlement covers borrowers who obtained mortgages through brokers, rather than directly from the bank. Wells Fargo agreed to conduct an internal review of its retail lending and compensate African-American and Hispanic borrowers who were placed into subprime loans when similarly qualified white borrowers received prime loans, which offer better rates.

Payments to any retail borrowers identified in the review process will be in addition to the $125 million to compensate borrowers who were victims of discrimination, the federal government said.

Perez, a former Montgomery County councilman, said he believed some Baltimore residents would qualify for payments under this review as well.

Baltimore first filed suit against the bank in 2008 but was forced to refile three times after Wells Fargo won a series of court victories. The fourth version of the city's lawsuit was filed in 2010 and identified more than 250 properties as blighted houses that fell into disrepair because of unnecessary foreclosures that resulted from dishonest loans. At the time, Nilson said the value of damages sought by the city would approach $20 million.

Under the terms of the deal, Baltimore's suit against Wells Fargo will be dismissed.

Perez said the settlement of the federal suit, which also includes payouts to Washington, Chicago, Philadelphia, San Francisco, New York, Cleveland and Riverside, Calif. —all hit hard by the foreclosure crisis — recognizes that foreclosures hurt communities as well as individuals.

"It all started here in Baltimore City," Perez said. "The lawsuit filed by Baltimore City in 2008 was the catalytic force, plain and simple. When you filed this lawsuit to call attention to the devastating consequences of this crisis, you got the attention of the federal government and you got the attention of the nation."